Merging two companies is a complex legal and business transaction. A short form merger, in which an acquiring company merges with a subsidiary corporation, offers a more streamlined process. However, like all M&A transactions, it is important to understand the legal nuances and proper due diligence in mergers and acquisitions.
What Is a Short Form Merger?
A short form merger, often referred to as a parent-subsidiary merger, is a merger transaction involving a parent company and its substantially owned subsidiary, with the parent company typically surviving the merger. Provided that statutory requirements are met, a short-form merger does not require approval of the stockholders of the subsidiary.
The requirements of a short form merger are dictated by state statute. For instance, under Section 253 of the Delaware General Corporation Law (DGCL), a parent corporation can merge with a subsidiary corporation provided the parent corporation owns "at least 90% of the outstanding shares of each class of the stock" of the subsidiary corporation. New York and New Jersey similarly require that the parent company own at least 90% of the subsidiary's outstanding shares of each class to complete a merger without authorization of the shareholders.
Once the merger is completed, only the acquiring company survives. Most short form mergers are "upstream," meaning the parent company acquires its subsidiary. The goal is often to acquire the remaining minority interests in the subsidiary that the parent doesn't already own. However, "downstream" mergers, where a parent company is merged into a subsidiary, are also possible. In such cases, approval by the parent's shareholders is generally required.
Benefits of a Short Form Merger
As compared with other types of mergers, a short form merger is a more streamlined transaction. The need to obtain minimal shareholder approval saves valuable time and money during the merger process. It also lessens the burdens as compared with other types of mergers. For example, the required due diligence in mergers and acquisitions involving a parent and subsidiary is much less arduous.
Requirements of a Short Form Merger
The requirements of a short form merger are established by state law and, therefore, can vary based on where the companies operate. Typically, in a short-form merger, the first step is for the parent company's board of directors to adopt a plan of merger. The contents of the plan generally include (at minimum):
- The name of each corporation to be merged and the name of the surviving corporation.
- The designation and number of outstanding shares of each class of each corporation to be merged and the number of such shares of each class, if any, owned by the surviving corporation, and if the number of any such shares is subject to change prior to the effective date of the merger, the manner in which such change may occur.
- The terms and conditions of the proposed merger, including the manner and basis of converting the shares of each subsidiary corporation to be merged not owned by the parent corporation into shares, bonds or other securities of the surviving corporation, or the cash or other consideration to be paid or delivered in exchange for shares of each such subsidiary corporation, or a combination thereof.
- If the parent corporation is not the surviving corporation, provision for the pro rata issuance of shares of the surviving corporation to the shareholders of the parent corporation on surrender of any certificates.
- If the parent corporation is not the surviving corporation, a statement of any amendments or changes in the certificate of incorporation of the surviving corporation to be effected by the merger.
The subsidiary's board does not have to approve the merger plan. In most cases, neither the parent's shareholders nor the subsidiary's shareholders must approve of the merger. Obtaining sign off from the subsidiary's shareholders is considered superfluous because the parent owns enough shares to guarantee approval. Meanwhile, approval of the parent's shareholders isn't needed because the transaction will not materially alter their interests.
Other corporate formalities vary from state to state. For example, Delaware law requires the board of directors of the parent corporation to (1) adopt a resolution approving a certificate of merger, and (2) furnish the minority shareholders a notice advising that the merger has occurred and that they are entitled to seek appraisal. The merger does not require a vote from the minority shareholders, absent contractual obligations to the contrary.
Steps in a Parent-Subsidiary Merger
While every M&A transaction is unique, a short form merger typically involves the following steps:
- Merger Plan: To conduct a short form merger, the parent company must own a significant portion of the subsidiary's shares; most states require at least 90%.
- Board Approval: The parent company's board of directors approves the plan of merger.
- Filing Certificate: A certificate of merger is filed with the relevant state agency.
- Acquisition of Remaining Shares: The parent company may acquire any remaining shares that were not previously owned.
- Subsidiary Dissolution: The subsidiary is effectively dissolved, with its assets and liabilities becoming part of the parent company.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
